Federal authorities believe that the three named members of the company’s board of directors—Jody Drake (aka Darla Drake), Nasser Ghoseiri, and Sonny Vleisides—spent millions of dollars of corporate revenue on all kinds of things, including saunas and guns, while ignoring many customer orders that went unfulfilled or were significantly delayed.

The case was filed in federal court last week in Missouri and unsealed late Monday, and it comes over a year after Ars first reported on the company and began testing its initial round of specialized computers designed to do nothing but mine for Bitcoin.

"The FTC alleges that one corporate defendant and three individual defendants have taken in over $50 million by operating a scheme that required consumers to pre-pay for machines that would allow consumers to ‘mine’ for Bitcoins, a new virtual currency," the complaint states. "Defendants either never delivered these machines or delivered them so late that they became obsolete."

No one from BFL, including the three named defendants, responded to repeated requests for comment by phone, e-mail, and Skype.

Unsubstantiated rumors on the Bitcointalk.org forums stated that BFL’s offices in Leawood, Kansas (just outside Kansas City) were "raided" by the United States Marshals Service (USMS) last Friday.

Nikki Credic-Barrett, a spokeswoman for the USMS, told Ars on Monday that one of her colleagues from the Western District of Missouri, whom she declined to name, said that the USMS was "present at this location on that day."

"Anything concerned with what happened is under seal," she said. "That's the most he could tell me."

UPDATE 11:17am CT: Helen Wong, an FTC attorney, told Ars that all three principals had been served with the lawsuit and that no arrests were made. The USMS, she said, was present to "keep the peace."

Initially, she explained, the case was sealed to prevent BFL from moving money around (or, in government parlance, to prevent "asset dissipation").

BFL is no longer in the hands of its principals but rather under a temporary court-appointed "receiver," a situation which will last until Monday, September 29. On that date, the judge can choose to extend the receivership or cancel it.

"The court granted the FTC's request to put the company under a temporary receivership," Wong said. "Basically everything is under the control of the receivership. The order allows us to locate documents and assets. The receiver has temporary custody of the company; everything is under his ownership until or unless the court decides otherwise."

Wong also noted that in this action—the FTC's first involving Bitcoin—seeks "full consumer redress," which, if successful, would result in refunds payable in US dollars.

"A stench coming from Butterfly Labs"

For the past year, BFL insisted that mere manufacturing delays were to blame for the company's woes. However, suspicion of active fraud never died down—and only worsened after it came to light that Butterfly Labs' largest shareholder, Sonny Vleisides, had violated the terms of his probation from a previous lottery scam case. As a result, Vleisides’ probation—previously slated to end in September 2013—has been extended for another two years.

Now, there is a stench coming from Butterfly Labs. It's a strong smell. It's not enough to send you to prison today, because, to be quite honest with you, if it was, we'd be talking about 24 months in prison. It's not—I think it's too close. I think [defense witness] Mr. Bourne did a very good job of testifying, and it assisted your defense greatly. But if I find out that there is this fraud word involved in this part, you know, Mr. Vleisides, as we say here at the courthouse, you need to get your toothbrush and get your things in order, because fraud will not be tolerated, you understand that? So I would work very hard to make these consumers happy consumers who you've dealt with.

Restoration Hardware and Hobby Lobby? Really?

In the new civil complaint, the FTC asks the court to freeze corporate and individual assets to "preserve them for potential restitution to victims" and to appoint a "temporary receiver" over the company.

Records indicate that once consumer funds enter into Defendants’ bank accounts, they are quickly dissipated. In recent months, despite receiving large sums of money each time consumers place orders, Defendants generally leave no more than approximately $2.5 million in the operating bank account. Instead, funds are depleted shortly after they enter into the bank accounts after consumers place their orders.

Cases abound

Further Reading

In December 2013, a German-Polish man who lives in China filed a lawsuit over a $62,000 order that was never fulfilled; he accused BFL of breach of contract, fraud, and negligent representation. And Butterfly Labs lost a civil case by default in Kansas’ Johnson County Court in late November 2013. The plaintiff, a Californian named William Lolli, won a judgment of more than $13,000 but told Ars earlier this year that he has not yet collected the award.

The company's troubles worsened from there. A lawsuit filed in early April 2014 (read the 21-page complaint) accuses BFL of engaging in "deceptive and unconscionable business practices." The suit, which seeks class-action status, was filed that same month in Kansas.

That case accuses BFL of collecting payment for "non-existent Bitcoin mining equipment, failing to ship Bitcoin mining equipment orders for which consumers have pre-paid, misrepresenting the date such equipment is to ship to customers, and profiting from Bitcoin mining for Defendant’s own benefit using customers’ equipment without permission or authorization from customers."

UPDATE 2:15pm CT: Butterfly Labs' spokesman, Charles Zinkowski, sent Ars this statement, declaring that the company was "disappointed in the heavy-handed actions" of the FTC.

"Butterfly Labs intends to defend our business and our nascent and promising industry," the company said. "The government wants to shut Butterfly Labs down, and we are not going away without a fight to vindicate bitcoin, our company, and our employees."

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Cyrus Farivar
Cyrus is a Senior Tech Policy Reporter at Ars Technica, and is also a radio producer and author. His latest book, Habeas Data, about the legal cases over the last 50 years that have had an outsized impact on surveillance and privacy law in America, is out now from Melville House. He is based in Oakland, California. Emailcyrus.farivar@arstechnica.com//Twitter@cfarivar